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People Top 5
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PEOPLE Top 5 are the most-viewed stories on the site over the past three days, updated every 60 minutes
- April 05, 1976
- Vol. 5
- No. 13
Economist Milton Friedman Calls the Income Tax 'An Unholy Mess' and Wants to Reform It
Do you do your own taxes?
My wife does, and I check it before it's sent in. I've never had anyone else do my income tax return. But it takes an enormous amount of time. I once made a rough calculation that the total number of hours of human labor spent in filling out IRS forms could be used to build 40,000 new homes a year.
What do you think of the income tax?
It's an unholy mess. It purports to tax people in accordance with their ability to pay, but it actually taxes people in accordance with their ability to find tax shelters and ways to get around the law.
But it's graduated, and isn't that supposed to be the fairest tax?
On paper the tax rates run from a bottom of 14 percent to a top of 70 percent. But in practice the high rates are pure window dressing. They yield negligible revenue because the tax law is full of deductions, ways to alter income and so on which make it possible to avoid the high rate.
Should we do away with tax loopholes?
Yes, indeed. I believe you would have a very much fairer tax if you simply imitated the best state income tax in the country—that of Illinois. You pay a flat rate on all income of every kind without any deductions in excess of $1,000 per person.
How would a flat rate work at the federal level?
Suppose you left the exemptions exactly where they are, $750 per dependent, but eliminated every single deduction and imposed the tax on the gross income after exemptions. Because you would have a much larger tax base, the flat rate would be 16 percent at most. Even if you cut it to 14 percent, the present lowest rate, you would wind up with more revenue.
Would this put an added burden at the lowest end of the income scale?
People at the low levels would benefit, because eliminating the loopholes would bring in so much more revenue that we could afford to lower tax rates even further. The people at the top would pay more, because they're the ones who go into these shelters.
Would a flat rate mean a one-line tax form?
Not quite. One page at most. You would need more than one or two lines only for occupation expenses.
What would be some of the other effects of eliminating loopholes?
It would mean the end of the tax shelter industry. There might be a significant effect on foundations and so-called charitable giving. But remember, before there was an income tax, there was a great deal of private charitable giving. The University of Chicago, founded by John D. Rockefeller, was established before the income tax was begun in 1913, as was the Carnegie Foundation. Anyway, I'm not sure it would be a mistake to dispense with the foundations.
How would the flat-rate tax plan affect the public at large?
The added incentive for people to earn, to save and to invest would mean increased employment opportunities. Right now, we are making it unprofitable for people to add to production. Especially at the high tax rates now, a man might as well consume his capital as invest it.
Do you advocate any other reforms in the tax system?
The simplest reform is inflation-proofing the income tax. If we did nothing else, we ought to do that now.
Why is it necessary?
Our present income tax is one that no Congress would ever have voted. Modest incomes carry a much heavier burden than 10 or 15 years ago. Under the present system, if prices go up 10 percent and your income goes up 10 percent, you might think you are in the same place. But you are not because your increased salary puts you in a higher bracket, and the tax you will have to pay goes up 15 percent on the average, making personal exemptions meaningless.
How would you "inflation-proof" income taxes?
I would make personal exemptions higher. Instead of $750 per person, it should be $750 times the price index number. If next year's prices are 10 percent higher than this year, the exemption would automatically go up from $750 to $825. In addition, you should be allowed a 10 percent increase in the ceiling of your tax bracket without paying increased taxes.
Let's take a family of four after straight exemptions, not itemizing deductions, and filing a joint return on $13,000 income. How much tax do they pay under the present system?
About $1,360. But this is misleading. Let's add on top of that Social Security. With one wage earner, the Social Security tax that family of four paid in 1975 was $825. If you add in the employer's contribution, that figure is actually $1,650. So there we have a family of four making $13,000 a year paying roughly $3,000—a rate of about 25 percent. And that isn't the end of it. There are excise taxes on cigarettes and liquor, sales taxes in some states, state and city taxes—perhaps 15 percent of the family income in other forms. That family would benefit from a flat tax rate.
Is the Social Security tax a fair tax?
The whole Social Security program is a fraud and a deceit. It is presented as if it were a private insurance program in which people pay contributions into a fund and ultimately get back what they put in. Well, that's utterly fallacious. There is no trust fund worth speaking of. In fact, today's taxes are going to pay Social Security benefits for people today.
What would you do about the Social Security tax?
I would give everyone entitled to Social Security the benefits he has supposedly already earned. He would receive a piece of paper saying that when he turns 65 he will be entitled to X dollars from the government. I would make sure we live up to all our obligations. Then I would abolish Social Security completely.
Do you think this would be a popular thing to do?
Maybe among the young. At some point or other, the young are going to revolt against paying benefits to older people. When the Social Security system began, there were eight or 10 people working for every person receiving benefits. Now it's something like three workers for each one, and soon it will be down to only two workers.
What about reform at the state level?
When Ronald Reagan was governor of California, he proposed a state constitutional amendment limiting government spending to a specific percentage of the personal income of the people. The amendment was narrowly defeated, but I think it will be passed in some states. If it gets started, I think we may very well see a landslide. I would like to see it done on the federal level too.
You have been the principal advocate of the negative income tax. How would it fit into the reforms?
Very nicely. Under the present structure there are two classes—those who pay and those who receive. The IRS imposes taxes on the first group, and the Department of Health, Education and Welfare passes out such things as food stamps, aid to dependent children and public housing to the other. A negative income tax, under which people with incomes below a certain level would receive a moderate payment, would be administered by the IRS. So would the positive income tax. There would be only one class of people. Everyone would file tax returns. Some would pay, some would receive.
If some reforms aren't forthcoming, what does the future hold?
In the past 40 or 50 years, the fraction of our income going for governmental expenses has risen from 10% to 40%. In Britain it is now up to 60%. I think it is a real question whether democratic government may not be destroyed in Britain in the next five years. If we get to that stage, we cannot avoid a major political crisis. It will be very difficult, if not impossible, to retain an essentially free and democratic society.
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